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The History of Economic Thought
Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore)Sources of information: SEC Marking Schemes, newspaper articles & documentaries
Watch out for the following definitions contained in this presentation!!
• Fiscal Policy• Monetary Policy• Consumer Surplus• Price Elasticity of Demand • Cannons of Taxation• Quasi Rent• Protectionism• Laissez-faire• Iron Law of Wages
• Law of Diminishing Marginal Returns
• Economic Rent• Law of Comparative
Advantage• Say’s Law• The Multiplier• Liquidity Preference Theory• Paradox of Thrift
LC Economics Syllabus
Economic System and Economic Thought • Brief historical outline of economic thought –
Smith, Marx, Keynes etc. • Market, centrally planned and mixed
economies.
Exam Questions OLShort
• 2013 Q 4 Keynes• 2012 Q 1 Smith – COT• 2007 Q 9 Match • 2006 Q 4 Match• 2004 Q 8 Cannons of Tax• 2003 Q 7 Match• 2001 Q 4 Match• 2000 Q 9 Smith
Long• 2010 Q 4 (b) Keynes - Mult• 2010 Q 5 (b) Smith - COT • 2008 Q 5 (c) Smith COT• 2005 Q 5 (c) Smith COT, DOL
Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore)Sources of information: SEC Marking Schemes, newspaper articles & documentaries
Exam Questions HLShort
• 2013 Q Paradox of Thrift• 2005 Q 8 Keynes • 2002 Q 4 Keynes• 2001 Q 8 Monetarists• 2000 Q 9 Smith
Long• 2013 Q7 Marx• 2012 Q 5 (c) Malthus• 2012 Q 8 (c) Keynes• 2010 Q 6 (b) Milton Friedman• 2009 Q 7(c) Ricardo• 2007 Q 4 (c)
Smith/Marshall/Keynes/Freidman• 2003 Q 8 (c) Smith
Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore)Sources of information: SEC Marking Schemes, newspaper articles & documentaries
Early Economists• Plato (427-347 BC)• Aristotle (384-422 BC)• Thomas Aquinas (1225-1274)
Not on the course but worth a look for interest sake!
Plato (427-347 BC)
Division of labour Currency system
Individual subordinate to the state
Public administration
& finance
Aristotle (384-322 BC)Unnatural wealth
unlimitedeg. exchanging
MoneyMeasure of
wealthStore of value
Value in useValue in exchange
True/genuine wealthlimited
Eg. agriculture, mining
Sisyphus!!!!
How the Greeks got into so much trouble!Independent July 2011
Thomas Aquinas (1225-1274)Christian principals
co-exist witheconomic life
Morality of wealth depended
on its use
Concerned about money lending &
unjust price charged for it
Common ground
The Mercantilist (1500-1780)
• Thomas Mun (1571-1641)
• Believed that;1. Gold was the prime measure of a
countries wealth.2. Exploitation of colonies.3. Protectionism.
The Physiocrat (1750-1800)• Francois Quesnay (1694-1774)• Wrote “Economic Table”.
• Believed that;1. Wealth had its origin in agriculture.2. Private ownership of property important.3. Non gov intervention (except for laws).4. Free trade.
The Classical Economists1. Adam Smith (1723-1790)2. Thomas Robert Malthus (1766-1834)3. David Ricardo (1772-1823)4. Jean Baptiste Say (1767-1832)5. John Stuart Mill (1806-1873)
Adam SmithClassical Economist
Scottish(1723 – 1790)“……The Wealth of
Nations”
Pursuit of self interest
Benefited individual therefore society
Division of LabourIncreases
productivity and a country’s wealth.
Eg. it takes 18 different operations to make a
pin!
Labour theory of value & wealth
The value of an item is equal to the amount of labour that goes into producing it
Laissez-faireNo justification for
government intervention except for defence/justice
Invisible hand of competition
Allows self regulation to
operate ensuring economic progress
Free TradeWith no tariffs/tax, markets operate
effectively & trade to be spread
between nations
Cannons of Taxation
Fair tax system; equity
economy certainty
convenience
Adam Smith
Thomas Robert Malthus
Classical EconomistEnglish
(1776-1834)“The Principles of
Population”
Theory of Population & Food
•Population grows geometrically (2,4,8,16,32).•Food grows arithmetically (1,2,3,4,5,6).•If population not kept in check famine & disease would result.•SOL did not fall in 19th C but his ideas were more relevant in the population explosion of the 20th C
Applied the Law of Diminishing
Returns to Land
•Best land taken up first, then next best, then inferior….•At each stage the amount of food is less than before.
Iron Law of Wages
An increase in wage above subsistence level= increase in population= increase in supply of
labour =decrease in wage
David RicardoClassical Economist
English(1772-1823)
“The Principles of Political Economy & Tax”
Economic Rent
•If population increases inferior land used.•For use of land rent was paid.•Cost of producing on the best land was lower.•Food produced on good land earned a surplus over that produced on inferior land.•This surplus led to an increased rent payable for the use of good land.
Law of Comparative
Costs/Advantage
•Supported idea of free trade.•A country should specialise in the production of those goods in which it is relatively most efficient .•And trade for the remainder of it’s reqiuirements.
Accepted the Subsistence Wage TheoryHe agreed that an
increase in wage above subsistence level= increase in population
=decrease in wage
Jean Baptiste Say (1767-1832)Wrote: “Treatise on Political Economy”
Says law
• “Supply creates it’s own demand”.• People make products they are most
efficient at. • They exchange their surplus for money.• They use this to buy goods that they want. • Therefore the supply of goods creates a
demand for goods.
John Stuart Mill (1806-1873)Wrote: “Principals of Political Economy…”
• He advocated the following;1. Demand & supply were important in
assessing the value of a product. 2. Law of diminishing marginal returns. 3. Predicted the emergence of dominant
firms.4. Establishment of trade unions to
counteract the power of dominant firms. Mill became disillusioned by the capitalist system &
began to lean towards a mild form of socialism.
“Nothing can be done for Ireland without transforming the rural population from cottier tenants into ….land proprietors (owners)”.
JS Mill, “Principles of Political Economy” (1848)
“Lessons in ingenuity from the Victorian
age.”
The Socialists• Karl Marx (1818-1883)
Karl MarxSocialistGerman
(1818-1883)“The Communist
Manifesto”
Labour theoryPeople required to
work more hours than necessary to
generate the income needed to pat their
wages.
ProfitLabour produced a surplus value which
was profit for employers
Two tiered society=unequal distribution
of wealthCapitalists (owners)Proletariat (workers)
Profits invested in technology
Reduced need for labour =
unemployment
Social revolutionWhere proletariat would take public
ownership of the FOP
PredictedGrowth of oligopolies
ForecastedEmergence of trade
cycles
Written by
K. Marx
Criticism ofKarl Marx
• The growth of unions ensured protection of working class.
• Middle & professional classes emerged.• Technology did not lead to mass unemployment.
However
• Predictions on oligopolies & trade cycles came true.
The Neo-classical Economists
• Alfred Marshall (1842-1924)
Theory of ValueThe value of an item is determined;•SR by utility and demand•LR by cost of production
Alfred MarshallNeo-classical
English(1842-1924)
“The Principles of Economics & Money, Credit & Commerce”.
Distribution of income/wealth
The return to each FOP is determined by their marginal utility
Growth of monopolies could be prevented
by;•Gov regulation•Consumer information•More accountability
Quasi RentEconomic rent earned
by FOP in SR when D>S
Consumer Surplus
The difference between what a consumer actually pays for a good and the maximum which he/she would have been willing to pay rather than going without it.
Price-elasticity of demand
Quantified buyers’ sensitivity to price
changes
Marshall’s scissors analogy.• Demand & supply are interdependent
just like the blades of a scissors.
Keynesian Economists• John Maynard Keynes (1883-1946)
John Maynard KeynesKeynesian
British (1883-1946)
“The General Theory of Employment, Interest &
Money”
Investment decisions
Depends on expectations not rate of interest
3 reasons (motives) for
holding wealth in the money form
Favored government intervention
• It is the job of the gov to run the economy
•Gov can use fiscal policy (any action taken by the gov which alters current revenue & exp) to create full employment.
•Eg. Decrease VAT to boost spending or increase gov spending to increase demand and create jobs
If Inv<Saving=LeakageLeads to a decrease in
national income & employment
Liquidity preference
theory
•Transaction motive•Precautionary •Speculative (See chap on capital)
The multiplierShows the relationship between an initial injection into the circular flow of income and the eventual total increase in
national income.
The paradox of thriftSaving too much leads to reduced
aggregrate demand
Milton FriedmanMonetarist
(1912 -2009)“A Monetary History of the US”
Monetary policyShould be the main instrument used by the government to manage the economy.(Actions taken by the gov/ECB which influences the money supply, interest rates and availability of credit).
Control of money supplyControl inflation by strict control of money supply.Restrict loans & high interest rates.
Reduction in inflationLeads to increases competitiveness,cheaper exports & job creation in the long run.Co’s keep wage increases to a minimum to avoid cost-push inflation.
Laissez faire•Minimum state intervention•De-regulation of markets•Privatisation
Supply side policies
Improve market efficiency, boost
supply, reduce the power of trade
unions.
The Shock Doctrine
Advisor to Nixon, Pinochet, Thatcher, Regan & GW Bush Jnr
Are We Witnessing the Shock Doctrine in Effect?
Milton Friedman debates Naomi Klein
Other Modern Economists• Supply-siders• J. K. Galbraith (1908-2006)
Supply-sider theoristsLate 20th Century
1. Economy developed by stimulating the supply of goods.
2. Reduce taxes, encourage work, investment & government revenue.
3. Deregulation & privatisation encourages competition, increase word production & reduce prices.
• Controversial because it advocates reduction of higher rates of tax which benefits the wealthy.
• However supply siders claim that reducing tax rates will lead to increased tax revenue.
• This is because increasing tax rates is a disincentive to work & invest.
J. K. GalbraithMaverick
Keynesian/liberalist(1908-2006)
• Wrote the book “The Affluent Society”.• Recommended that
governments should increase tax to reduce conspicuous consumption.
• Warned of economic power of multinational oligopolies.
Some Irish Economists• Richard Cantillon (1680-1734)• David Mc Williams• Constantine Gurdiev• Susan Hayes• Morgan Kelly• Colm McCarthy• Dr. Brian O,Boyle
We adpoted him!
Suggested Resources• Print out this pp and cut into 6 pieces
to use for “My Little Book” methodology.
• Cloze tests• Crosswords• Matching exercises• Wordwall games • Exam questions templates
The Business 2,000 Economics Challenge online
The Scoilnet History of Economic Thought
• Both have been copied here in case you do not have internet access or you may use these resources for tests.
Click below for on-line quiz
Watch out for the following definitions contained in this presentation!!
• Fiscal Policy• Monetary Policy• Consumer Surplus• Price Elasticity of Demand • Cannons of Taxation• Quasi Rent• Protectionism• Laissez-faire• Iron Law of Wages
• Law of Diminishing Marginal Returns
• Economic Rent• Law of Comparative
Advantage• Say’s Law• The Multiplier• Liquidity Preference Theory• Paradox of Thrift
“Bad money” notes & coins
“Good money” precious metals
Gresham’s Law